Aid for Middle Class, Pain for Private Equity

The U.S. House of Representatives passed legislation Wednesday to exempt middle-class households from unexpected tax hikes from the alternative minimum tax. The tax initially aimed at wealthy tax evaders and became law in 1969 without indexing for inflation. Thus, 25 million families would face $62 billion in tax hikes, according to estimates from the Congressional Budget Office.

Democrats decided to pay for the revenue loss by taxing hedge funds and private equity firms, which could double the amount these managers pay in taxes. The change would tax "carried interest" at individual income rates rather than capital gains rates.

House Speaker Nancy Pelosi (D., Calif.) said in a statement:

Today's House action ensures that 25 million families will receive essential relief from the alternative minimum tax, a provision of tax law that was meant to ensure the wealthy paid their fair share, not to tax middle-class families who are struggling with the high prices of gas and groceries.

The vote mostly followed party lines, 233-189.

The legislation also proposes eliminating tax deductions on domestic oil companies, like Chevron (CVX Quote - Cramer on CVX - Stock Picks)and Exxon Mobil (XOM Quote - Cramer on XOM - Stock Picks). It would remove production incentives.

Republicans opposed the measure. House Minority Leader John Boehner said:

The high price of gas is the No. 1 issue on the minds of the American people. In poll after poll, resounding majorities support increased production of American energy. Yet, as Congress prepares to head home for Independence Day, not only is the out-of-touch Democratic leadership refusing to allow us an up or down vote on policies to increase the supply of American energy, they are actually bringing a bill to the floor with a tax hike that would raise gas prices even higher.

The showdown over the revenue measure heads to the Senate next. Republicans have more leverage in that body and only need 40 senators to filibuster the legislation. Furthermore, the White House has expressed its displeasure with the revenue loss and has vowed to veto it.